In its concept note on the CBDC released on Friday, the RBI, while announcing its plan to roll out limited pilot launches of the electronic or e-rupee, has said that this would need elaborate planning in terms of scope, cost and timelines to ensure the timely rollout of different phases of CBDC introduction. That would essentially mean experimenting with the wholesale segment — industry and trade first — to assess operational efficiency and acceptability before moving on later to the challenging segment, retail. This is the glide path that major central banks have followed reflecting what the US Federal Reserve chair, Jerome Powell said earlier this year: “We (the US) don’t need to rush this project and we don’t need to be the first to market “.
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Indeed, China has been working on a CBDC for over nine years while in the US, after a four-month public consultation earlier this year by the Fed Reserve, the White House issued an executive order to ensure responsible development of digital assets. President Biden has said that his administration has placed the highest urgency on research and development efforts into potential design and development options of a digital dollar. The executive order mandates the Office of Science and Technology Policy in consultation with other federal departments and agencies to submit a technical evaluation for a potential digital dollar or CBDC. The National Science Foundation will lead an inter-agency effort to develop a National Digital Assets R&D agenda.
All this has been framed to address any potential threat to the global dominance of the US dollar, with the emergence of digital assets such as crypto and stable coins. There are other lofty aims too like using technology to “advance democracies to lift people up, not to hold them down", to quote President Biden.
For China, with its e-CNY or digital renminbi, the motivation or policy objective is perhaps different. For the Chinese central bank, the worry may be the dominance in the payment system of the two major players — Alipay and WePay — and the need to counter it. There is a convergence between India and China in the adoption of digital, transaction volumes online and payment and the rising number of customers with growth in India heading North. In that sense the successful digital adoption in India should smoothen the path for the launch of a digital rupee.
But logically, many are bound to ask if the CBDC or a digital currency ought to be introduced in a country where multiple digital payment options even for small-ticket transactions are on offer — through UPI, the NEFT, RTGS, IMPS, digital wallets and the like. A policy objective of a CBDC is financial inclusion but that should first be addressed by governments by boosting incomes and improving financial literacy. If, as the RBI says, the CBDC should at best be viewed as a complementary option to other payment systems, the success of a digital rupee then should be viewed from the competition which follows and the improved efficiencies in the payment system. However, it is important also to distinguish between the UPI which is just a payment platform and a CBDC which backed by the sovereign.
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The launch of the CBDC will not make any difference to the Indian central bank’s balance sheet. The smell test could be on four counts to borrow from the US Fed Chief — privacy, verification of identity, intermediation and wide acceptance. Surely that is what the RBI should also be pursuing besides inter-operability, cyber security, safety and liquidity.
Where the digital rupee holds real promise from an Indian perspective is in the area of cross-border transactions where costs are high and the transaction time can be long. Forging agreements with other central banks on this is what could well be the real game changer.
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